As was so evident at COP26 recently, unlocking the power of financial markets to accelerate investment in the new infrastructure and technologies required, including by providing insightful, comparable and relevant ESG disclosures to investors and increasing the cost of capital for polluting and damaging businesses which are not on a transformation pathway, is key.
All IFC jurisdictions are conduits for global investment and have a responsibility to leverage their expertise and capital to this end. Centres for alternatives, such as Jersey, have a role in providing private finance through asset classes such as venture capital, private equity, private debt, infrastructure, and real estate to take the solutions we need to scale.
Jersey takes this responsibility seriously and earlier this year launched Jersey for Good, which is Jersey Finance’s strategy for sustainable finance. Developed with inputs from across the local industry, the goal is for Jersey to be recognised by its clients, key stakeholders and other partners as the leading sustainable finance centre in the markets it serves.
The goal is an ambitious one, implying industry-wide mainstreaming of sustainable finance rather than a sustainable market segment alongside business-as-usual. But that is exactly what is needed given the pace, urgency and connectedness of the challenges and how markets are responding to regulatory and investor pressure. *PwC’s analysis suggests that 60 per cent of European mutual assets will be ESG aligned by 2025. More recently, PwC’s Global Investor Survey published in October shows that 79 per cent of investors now consider ESG risks an important factor in investment decision-making, whilst 49 per cent would now be willing to divest from companies that aren’t taking sufficient action.
So, what practical action is Jersey taking to realise this goal? The island’s industry has been active in this area for some time and has solid foundations upon which to build. For example, The International Stock Exchange (TISE) has had a green segment since 2018, recently relaunched this year as TISE Sustainable, a partner exchange of the UN’s Sustainable Stock Exchanges initiative. Moving forward, here are five key features of Jersey’s approach this year:
- Building a community of practice: Jersey has a growing community of ESG professionals in the finance industry who share insights and good practice on a regular basis. But beyond this, the island needs to further upskill a range of finance professionals on relevant aspects of ESG, from trustees, to fund administrators, to investment managers, to accountants and lawyers. Jersey Finance has developed a series of regular webinars and events and has secured preferential rates for relevant training solutions for the island. In 2021, a programme was also launched in partnership with local businesses to take a cohort of next generation leaders from across the island through an action learning approach.
- Taking a balanced approach to regulation: Earlier in the year and working closely with industry to build a pragmatic and workable approach, Jersey’s Financial Services Commission (JFSC) introduced new anti-greenwashing legislation. More broadly, increasing numbers of Jersey entities and fund structures are caught by sustainable finance regulations in other jurisdictions, such as the EU’s Sustainable Finance Disclosure Regulation or the UK’s TCFD-aligned climate disclosure requirements. This is a fast-moving agenda and it will be important for Jersey to align with what is effectively emerging as good practice. The JFSC has therefore recently joined the Network for Greening the Financial System, which is the leading network for central banks and supervisors to share best practice on how to manage climate risk and mobilise mainstream finance to support the transition to a sustainable economy.
- Fostering innovation: With its long history of reinventing itself, high regulatory standards, access to investors, and a fast-growing digital economy with the fastest broadband speed in the world, Jersey is well placed for entrepreneurs to expand on FinTech, RegTech and WealthTech experience to build new solutions at the interface of sustainable finance and digital technology. There is a growing and exciting array of digital start-ups alongside more established players in this field.
- Forming partnerships: No one jurisdiction can tackle the sustainable finance challenge on its own. Through Jersey Finance, the island is now a member of UNDP’s (United Nations Development Programme’s) Financial Centres for Sustainability (FC4S) network, which now comprises 39 financial centres around the world sharing experience, driving convergence, and taking action on shared priorities to accelerate the expansion of sustainable finance. Jersey participated in this year’s FC4S stocktake exercise, which will further help identify where the island has strengths and opportunities for further improvement on institutional foundations, enabling environment and market infrastructure for sustainable finance.
- Greening the island: To be credible, a sustainable finance industry needs to operate from a location that walks the talk. As is often said in Jersey, “we can’t have green finance on a grey island”, or vice versa. Much has already been achieved, with Jersey’s electricity already low carbon at only 24gCO2e/kWh, roughly a tenth of the UK’s current supply. But with the Paris Agreement formally extended to Jersey this year, work is underway to set out specific policies that will enable the island to be carbon neutral by 2030, on a journey to a net zero island by 2050. The finance sector is committed to supporting this journey as responsible businesses on the island, both by playing its part in on-island decarbonisation and sharing expertise for innovative on-island low carbon financing solutions.
So, what’s next? Jersey, like all IFCs, is on a sustainable finance journey. As we reflect on the outcomes of COP26 in particular, here are five themes IFCs should consider going forward. All of these represent significant growth opportunities, but failing to pursue them could also spell the demise of IFCs which do not stay relevant:
- The race to net zero is being driven by investors, asset owners and financial institutions. The Glasgow Financial Alliance for Net Zero brings together all financial services sector commitments to net zero, and this is increasingly being pushed down the value chain. Clients will want to see measurable action through their portfolios, and also be convinced that their service providers are taking corporate action themselves. Jurisdictional level science-based net zero commitments will also be increasingly important. IFCs need to be ready to respond to this as an opportunity; there is significant value to be created through different strategies to transform investment portfolios to net zero.
- Long-awaited consistency in ESG metrics and standards is coming with the recent creation of the International Sustainability Standards Board (ISSB). Although the details are still to be confirmed, it is clear that this will incorporate the key frameworks that are becoming de facto good practice, perhaps notably the forward-looking TCFD (Task Force on Climate-Related Financial Disclosures) framework. Clients want insightful and balanced reporting on a comparable basis, with sustainability metrics rapidly becoming as important as financial performance. IFCs will need to be ready with the skills to elevate the rigour and quality of data and its assurance.
- For the first time, the Glasgow Climate Pact refers to the phase down of coal. What does that mean for IFCs? At what point might IFCs commit to phasing out coal finance? When might negative screening against coal be introduced? Under what conditions? What is the reputational risk for IFCs of choosing not to do this?
- The financing gap to support developing countries in adapting to climate change is still significant and was a major stumbling block in the Glasgow negotiations. This also represents a huge opportunity for private sector investment, coming in behind blended finance initiatives that are designed to de-risk investment in emerging markets. We expect to see significant further capital flows in this direction, in particular in key sectors such as transport, infrastructure and agriculture.
- Last but by no means least, nature-based solutions are now seen as integral to solving both the climate and ecological crises. We expect to see considerable flows of capital to nature-based and natural capital-based solutions. IFCs will need to consider how they position themselves as jurisdictions of choice for these investments. Action is now underway to develop an international disclosure framework for nature-based risk, which is likely to add further considerations in terms of data requirements and implications.
These are exciting times for the evolution of IFCs as conduits for sustainable finance. IFCs such as Jersey all need to continue to build their capacity and capability to harness the opportunities. There will be winners and losers in the race to a more sustainable future, and IFCs all need to ensure they stay relevant and reinforce their reputation as good global actors.
ESG & Net Zero Director and Jersey Finance Sustainable Finance Steering Committee member.